China's big five state-owned banks plan to set up asset management companies (AMCs) to take advantage of the government's debt-for-equity swap scheme

China’s big five state-owned banks plan to set up asset management companies (AMCs) to take advantage of the debt-for-equity swap that is part of the central government’s push to reduce corporate debt.

Caixin reported on Wednesday morning that the banks will announce plans to set up AMCs, but one institution has already shown it’s ahead of the rest, while another struck a deal with a state-owned enterprise.

The big five are Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and the Bank of Communications, according to the report. Each of the banks are to cough up US$1.45 billion to set up subsidiaries to undertake debt-for-equity swaps.

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Asset management companies or AMCs are financial vehicles tasked with handling bad debt through various mechanisms.

The Agricultural Bank of China announced on Tuesday that it is setting up a wholly owned subsidiary called ABC Asset Management Co Ltd with a registered capital of 10 billion yuan (US$1.45 billion) responsible for debt-for-equity swaps.

The debt for equity swap scheme is part of the central government’s drive to lower corporate debt that is now at US$18 trillion, which is 169% of the country’s gross domestic product. It announced guidelines in October to lower the country’s corporate debt led by debt-for-equity swaps, mergers and acquisitions and other mechanisms.

In October this year, China Construction Bank signed a landmark deal with Yunnan Tin Group worth up to US$1.5 billion with the aim of lowering the debt of the world’s biggest tin exporter and producer. CCB announced on November 15 that it signed a US$3.1 billion debt-for-equity deal with Shandong Energy Group Co, one of the country’s largest coal producers.

At the provincial level, the China Banking Regulatory Commission, the state agency in charge of bank regulations, relaxed rules to allow local governments to set up more local asset management companies to tackle bad debt at the provincial level.

An unnamed source from one the five banks told Caixin that the setting up of subsidiaries is meant to separate the risks between the banks and the entities, and also to establish entities dedicated to undertake debt-for-equity swaps.

Through the hiring of industry experts and professionals under the subsidiaries to manage the day to day administration, this will allow for a “proper exit” once the task is completed, the source said.